A Beginner’s Guide to Impact Investing

Investment gives people a better shot at making more money than they can possibly earn during their employment days. Financial advisors usually encourage people to be more bold and trusting when it comes to these things. But what they sometimes fail to tell us are the moral implications of our investments. The first thing that would usually come to mind is, if considering these implications are necessary. We make money and that’s it, no more blah blahs on the side, right? Well, this is where the Impact Investment comes in.

What is Impact Investment?

Impact investments are those investments when a person’s financial goal are met but should also create good effects for the society and environment. It aims to make the person have profit in the safest way possible. From the product itself to how it’s made are all considered in impact investing.

One positive side of this is that it gives people the freedom to choose companies that they actually believe in. Unlike before, we are only drawn to invest in companies which make the most money, regardless of what it does and how it does it. In impact investing, a person who is against smoking should not invest in a tobacco company, no matter how good the returns are. They can choose companies that support their causes such as cruelty-free cosmetics and reusable straws.

Impact investing can also be exercised by upholding labor ethical standards. These ethical standards include making sure that minors were not a part of the production. They can also look into the safety precautions of the company and also if they are paying the right wage to workers.

People who want to invest can do it either through private equities, fixed-income securities, and more, for a minimum of $1,000. Over the last years, growth in impact investing has continued to swell up. In 2009 alone, more than $50 billion has been allocated to impact investing and will probably reach $500 billion in 2019. These investments will help open doors for more companies and start-up business that can positively impact the world.

What Impact Investing is not?

Some articles on the internet compare impact investing to philanthropic and charitable acts. Why? Because just like philanthropists, impact investors aim for a better world. But this a misleading information. According to Professor Elena Loutskina of the University of Virginia, impact investment is not charity because it expects a return on investment. She also pointed out that impact investment somehow emerged because such philanthropist acts failed to address the social issues.

Charities give money to the less fortunate in ways they see fit. They are disconnected to what is really going on in the community. What impact investing does is that it invests in local entrepreneurs in the community who have the knowledge of what their community needs.

Core Characteristics of Impact Investing

Intentionality

The investor should have an intention to leave positive social impacts. It’s not enough to invest just because it’s the current trend and being part of it is a sure return of investments. Intentionality is the essence to impact investing and without it, the investment is hollow. Investors may also choose to invest in those causes which are close to their hearts.

Investment with return expectations

As mentioned earlier, the expectation of getting something in return sets impact investment from charity and philanthropy. The more it makes profit, the more it can fund locals and businesses to continue what they do. Things such as technological innovation, research, and creating credit can also be done if there is a return in capital.

Range of return expectations and asset classes

The returns of impact investment can range from concessionary or below-market up to market-rate investments. This means that not all returns can instantly give the investors a significant sum of money. This is most felt when investors fund local entrepreneurs. The movement of return can be slow which is why intentionality is important to keep people motivated.

Impact measurement

This is where the investors are all committed to report the progress of their campaigns. It promotes transparency to how the business is doing and what are the positive impacts it has been doing. This characteristic can help voice out and promote impact investing.